Project Management – Spring 2024

Dr. Ibrahim Nabil Eldesouky

Faculty of Engineering
German International University (GIU)
Topics
1. Project Management basic concepts
2. Define the Project scope and priorities.
3. Estimate the project time and cost.
4. Risk Management.
5. Schedule resources.
6. Project team management.
7. Progress and performance evaluation.
8. Project closing

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 Lecture 7 - The Project Cost

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Learning Outcomes

• Understand the various types of common project costs and key

differences between them.

• Apply common forms of cost estimation for project work, including

ballpark estimates, definitive estimates, parametric estimates, and
learning curve.

• Apply top-down, bottom-up, activity-based, and time-phased

budgeting procedures for cost management.

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 Classification of Project Costs
Sources of
Project Cost

Subcontract Equipment
Labor Materials Travel
ors & facilities

Types of Costs

Direct Vs Recurring Vs Fixed Vs Normal Vs

Indirect Nonrecurring Variable Expedited

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Sources of Project Cost
1.Labor 2. Materials

• Labor costs are those associated with • Materials costs apply to the specific
hiring and paying the various personnel materials and supplies the project team
involved in developing the project. will require to complete project tasks.

• These costs can become complex, as a • For building projects, materials costs
project requires the services of various are quite large, in the service industries
classifications of workers (skilled, may involve little or no materials costs.
semiskilled, laborers) over time.

• At a minimum, a project cost

estimation must consider salary and
hourly rates, and any overhead issues
such as pension or health benefits.

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Sources of Project Cost
3. Subcontractors 4. Equipment and 5. Travel
facilities
• When subcontractors • Firms commonly include • If necessary, expenses
provide resources (and rental of equipment or that are related to
in the case of consultants, office facilities as a business travel (car
expertise) for the project, charge against the cost rentals, airfare, hotels,
their costs must be of the project. and meals) can be
included into the applied to the project
preliminary cost estimate as an up-front charge.
for the project and its
budget.

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Types of Costs
Direct Vs Indirect Recurring Vs Fixed Vs Variable Normal Vs
Nonrecurring Expedited
Direct Cost Nonrecurring costs Fixed costs Normal costs
• Those clearly • Associated with • do not vary with • Those incurred in
assigned to the charges applied once respect to their the routine process
aspect of the project at the beginning or usage. of working to
that generated the end of the project. complete the project
cost. Variable costs per the original,
• Labor and materials Recurring costs • are those that planned
may be the best • are those that increase through schedule agreed to
examples typically continue to usage; the cost by all project
operate over the is in direct stakeholders
Indirect Cost project’s life cycle. proportion at the beginning of
• Two features: to the usage level the project.
General and such as equipment
administration rental per day. Expedited costs
overhead costs. • unplanned costs
incurred when steps
are taken to speed
up the project’s
completion.
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Cost Classifications

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Project Price Breakdown

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Cost Estimation

Ballpark Comparative Feasibility Definitive

estimates: estimates: estimates: estimates:
are used when assume that are based on These estimates
either historical data real numbers or can be given
information or can be used as figures derived only upon the
time is scarce. a frame of after the completion of
• Companies reference for completion of most design
often use them current the preliminary work, at a point
as preliminary estimates on project design when the scope
estimates for similar projects work. and capabilities
resource • The degree of of the project
requirements. accuracy of are quite well
• The accuracy ± 10% understood.
± 30% • The accuracy is
± 5%

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Learning Curves

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Example 1

• Suppose that you are assigning costs to a

major project to be undertaken this year Learning Curve Coefficients (Unit
by your firm, DynoSoft Applications. Time and Total Time Multipliers)
• One coding process involves many labor-
hours, but highly redundant work.
• You anticipate a total of 200,000 labor-
hours to complete the first iteration of the
coding and a learning curve rate of 70%.
• You are attempting to estimate the cost of
the twentieth (steady state) iteration of
this coding sequence.
• Based on this information and a $60 per
hour labor rate, what would you expect to
budget as the cost of the twentieth
iteration? The fortieth iteration?

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Solution

TN = T 1 C

• T20 = T1C = (200,000) (0.214) = 42,800 hours

• T40 = T1C =(200,000) (0.150) = 30,000 hours

• The costs for the twentieth and fortieth iterations are found as:

• Twentieth iteration: (42,800 hours) ($60 per hour) = $2,568,000

• Fortieth iteration: (30,000 hours) ($60 per hour) = $1,800,000

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Example 2

• Assume you are a project cost engineer calculating the cost of a

repetitive activity for your project.
• There are a total of 20 iterations of this activity required for the
project.
• The project activity takes 2.5 hours at its steady state rate and the
learning rate is 75%.
• Calculate the initial output time for the first unit produced, using the
learning curve formula.

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Solution

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Example 3

• Assume the need to conduct a project cost estimation in the case of

construction, where one resource will be tasked to perform multiple
iterations of a similar nature (e.g., fitting, riveting, and squaring).
• The worker must do a total of 15 of these activities to reach the steady
state.
• Also, assume that the time estimated to perform the last iteration (the
steady state) is 1 hour, and we know from past experience the learning
rate for this highly repetitive activity is .60.

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Solution

• b = log 0.60/log 2 = -0.2219/0.301 = -0.737

• 1 hr. = a(15)-0.737

• a = 7.358 hours

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Problems with Cost Estimation

• Low initial estimates.

• Unexpected technical difficulties.

• Lack of definition.

• Specification changes.

• External factors.

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Creating a Project Budget

• The Budget is a plan that identifies the resources, goals, and schedule
that allows a firm to achieve those goals.

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Activity-Based Costing

Projects use activities and activities use resources.

• Identify the activities that consume resources and assign costs to

them.
• Identify the cost drivers associated with the activity.
• Resources in the form of project personnel and materials are key cost
drivers.
• Compute a cost rate per cost driver unit or transaction. Labor, for
example, is commonly simply the cost of labor per hour, given as:
Cost rate/unit→ $Cost/hour
• Assign costs to projects by multiplying the cost driver rate times the
volume of cost driver units consumed by the project.

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Sample preliminary budget

• The purpose of the preliminary budget is to identify the direct costs

and those that apply to overhead expenses.
• Then the total cost is calculated as in table 1:

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Budget periodic updates
• Table 2 shows a budget in which the total planned expenses given in
Table 1 are compared against actual project expenses. With periodic
updating, this budget can be used for variance reporting to show
differences, both positive and negative, between the baseline budget
assigned to each activity, and the actual cost of completing those
tasks.

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Sample time-phased budget
• Table 3 shows a sample from a time-phased budget, in which the total
budget for each project activity is distributed across the schedule when its
work is planned.
• The time-phased budget allocates costs across both project activities and
the anticipated time in which the budget is to be expended.
• It allows the project team to match its schedule baseline with a budget
baseline, identifying milestones for both schedule performance and
project expense.

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Any questions?

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